where orders emerge

This could be the start of something big

Inflation at the wholesale level surged unexpectedly in January,
reflecting sharply higher prices for gasoline and other energy products.

The Labor Department said Thursday that wholesale prices increased
by 0.8 percent last month, the biggest gain since last July and well
above the 0.2 percent increase that economists had expected.

From the end of the article:

Despite the big jump in wholesale prices in January, economists do
not believe inflation is on the verge of becoming a problem, given the
country's deep recession.

No economists are quoted to support this belief, save one optimist, coming here at the very end of the article:

That downturn, which began in December
2007, has been keeping a lid on inflation pressures, which has given
the Federal Reserve the room to slash a key interest rate to nearly
zero without having to worry about kindling inflation.

Federal
Reserve Chairman Ben Bernanke told an audience at the National Press
Club on Wednesday that he saw little risk that the Fed's efforts to
fight the recession and a severe financial crisis would trigger
inflation presusres.

He said that once the economy begins to
rebound and financial markets stabilize, the Fed will be able to
quickly reverse the actions it has taken before inflation becomes a
problem.

In next Monday's podcast, Allan Meltzer argues that this will not be possible politically. I fear he's right.

Comments

Russell,
Let me say a few thing about inflation and perhaps you may ask Allan about them.
1. The distinction between changes in relative prices and a general increase in nominal prices. As you may remember M. Friedman and many others defined inflation only as a general increase in nominal prices. In practice, because of how CPIs are estimated, you may fail to distinguish between changes in relative prices and inflation. What happened in 2004-07 was clearly a change in relative prices (in the Latin American countries, where inflation used to be high after WWII, changes in relative prices were huge because of government intervention, but in addition there was inflation because governments used to finance their large defictis by printing money). Indeed the financial crisis of 2008 triggered a collapse of commodity prices and new changes in relative prices. So far, I don't think inflation is a problem. To become a problem monetary conditions should change radically.
2. The definition of money. To analyze monetary conditions we must agree on a definition of money, but there has been no progress in the past hundred years. In the 1970s, when I was teaching monetary economics in Chile, I liked to use M? as my definition of what I didn't know. If I have to choose one M?, I still prefer M0, that is, currency in circulation. All the other M?s have shown to be useless, not just because of Goodhart law but largely because of the many substitutes for M0 as a store of value. I quit teaching monetary economics because I eventually believed that there was no way to introduce money in economic analysis (a point that Neil Wallace later, I think it was in a paper around 1997, argued in detail). The problem was further complicated by the increasing reliance on what Fama called the accounting system of payments as a result of the use of e-money as a substitute of M0 for means of payment.
3. The composition of the monetary base. Before 1980, we liked to talk about the multiplier of the monetary base (Allan with K. Brunner made a number of contributions to its analysis). The assumption was that the monetary base consisted of two components–currency in circulation and bank reserves in the central bank–that were good substitutes because the reserves were not conditionally borrowed from the central bank. I have not seen the latest numbers but I understand that in the past 6 months the increase in bank reserves in the Fed has been extraordinary, but largely as a result of borrowing from the Fed. If this is true, then the Fed will be able to do what Bernanke suggests at the end of your post.
4. Finally the demand for money. Of course, we need a definition to discuss it, but most economists prefer to discuss monety without saying how they are defining it. In particular, the discussion of the liquidity trap has gone nowhere because participants have a strong inclination to change the definition implicitly. Some good economists have insisted that the confidence problem is shown by an increase in the demand for all sorts of government papers and they may be right, but this is not the liquidity trap that you learn in IS-LM models. If it is true that people have come to have such a strong preference for government securities, then there will be room (albeit temporary) for government to become a financial intermediary–but it doesn't mean that government has to allocate the funds directly (in financial economics, it is called two tier banking: the state banks get the deposits but then they allocate the funds through private banks). There are at least to serious problems: 1) how to transfer the funds that are now deposited into the banks and other private intermediaries (I'm not saying that all funds have to be transferred) and substitute government securities for them; and 2) how to reallocate the funds to borrowers under the new circumstances. The only alternative to this temporary government intermediation is to restore confidence in some of the existing banks and private intermediaries, and the question is how to do it. Unfortunately, the new Fed/Treasury team has already failed to develop this alternative.

twFebruary 19, 2009 at 10:35 am

Just how big do you think this problem could get?

I've read recently that the Fed has increased our money supply by roughly 95% since September 2008, which certainly has to be inflationary at some point. And I share your fear that they'll be unable to reverse policy easily to contain the problem.

What, you don't believe that the federal government can predict accurately and timely the moment that price increases reflect a turnaround in business activity? You don't believe the government can turn on a dime to reverse it's production of unprecedented levels of money and credit? You don't think they can massively contract the money supply to the precise level that will balance the number of dollars, the velocity of money, and the real value of goods in our economy?

Russ, you are one tough critic.

SaulOhioFebruary 19, 2009 at 10:55 am

Isn't that what they said last time, when they had the funds rate down to 1% in 2004, that there was little risk of inflation? Then we got the housing bubble.

When are these Fed people going to pull their heads out of their you-know-whats?

I was just thinking while reading Russell's post; "My god, these people don't know what money is."

Money is whatever is used to perform the accounting function of economic transactions.

Thus, when I write a check, I create a form of money. It is a promise of payment, eventually, in the form of resources/consumables.

Currency is a portable and anonymous form of this function.

By holding interest rates low, the FED has fomented the expansion of credit.
By printing currency to cover debts, the gov't foments currency inflation.

Such actions create entitlement without corresponding production of value.

As I claimed elsewhere, Keynesians assume that value will be created merely by putting more money into circulation.

But people don't create value because they have money, they create value because they need money to exchange for resources/consumables.

IOW, people don't go to work because manufacturers need workers, they go to work because they need to create value for which they expect to be paid, eventually with the values created by others. The need to consume is given.

One thing leads to another.

JWFebruary 19, 2009 at 11:07 am

…the Fed will be able to quickly reverse the actions it has taken before inflation becomes a problem.

Meltzer is right of course. What political will? The same Greenspan/Bernanke/Will-of-Congress/clueless Fed that could not get itself to raise rates from 1% when EVERYTHING seemed peachy-keen and rosy, eons ago?

BobFebruary 19, 2009 at 11:53 am

Russ,
Isn't investing money in technically insolvent banks what Mises called bad money chasing good money out! The stockholders, good money, have essentially left Citi, BoA and others. While government new money, bad money, has come into these institutions?
Bob

MorganFebruary 19, 2009 at 12:36 pm

For those looking for data on the recent anomolous increase in the monetary base, see here:

No Russ the something BIG started some time ago and came to a head on Sept 18 2008 when an emergency meeting was called and Hank Paulson and Ben Bernake informed us the world financial system and our economy as we know it will evaporate if something is not done immediately.

The something big occurred when Glass-Steagall was over turned and the something big occurred when Bear-Stearnes closed its doors. The something big occurred when the SEC meet and increased the amount of leverage the big banks could take on… the something big occurred when Phil Gramm snuck in the Commodity Futures Modernization Act and the something big already happened as we see in the breaking news of possibly 19,000 accounts of tax evasion with deposits to UBS (Phil Gramms company). Oh and the something big occured when GW Bush doubled our national debt in 8 years.

Everything here on out is just the fall out from these previous "something bigs" that occurred when we systematically deregulated the big picture items of our finance system.

Marty SFebruary 19, 2009 at 1:15 pm

Muir,

when we systematically deregulated the big picture items of our finance system.

Prove it, you lying dumbass. Show me the evidence. I want numbers. Give us the number of departments dismantled, number of laws repealed, numbers on the lack of new laws during this period. Glass Steagal was passed with overwhelming democratic support, you twerp, How come you never mentioned that you jerk? It is democracy at work. You don't like it? You can leave the country.

He said that once the economy begins to rebound and financial markets stabilize, the Fed will be able to quickly reverse the actions it has taken before inflation becomes a problem.

Is anyone taking bets?

Are they using financial climate models?

Caliban DarklockFebruary 19, 2009 at 3:23 pm

We need to get this train moving NOW! So we're going to push HARD! And if it starts going too fast, we'll just jump in front of it and push the other way…

Mario AbbagliatiFebruary 19, 2009 at 4:03 pm

If the FED prints money at will, but banks don't lend and people don't borrow, where would that lead us to?

boqueronmanFebruary 19, 2009 at 6:32 pm

I enjoy visiting Cafe Hayek on an occasional basis. I'm certainly not technically versed enough to understand all the discussions, much less agree with everything I read. I assume most readers are like me. They get some useful information and some provocative opinions. And then there's this muir guy. He only, apparently, comes to criticise. And the criticism is always politically partisan. According to him, everything that happened during the last 8 years – including, I guess, everything from the passage of the minimum wage hike and the resultant increase in teen unemployment to the warming trend on Mars – is the fault of the GOP. I really don't find it helpful because it doesn't come from an honest, scholarly analysis of data surrounding a complex system such as the U.S. economy. If it did it would not always come out unfailingly with a unified result – GWB and the Republicans did it. Nothing discussed here is that simple. Help me. Is there a sort of Troll Central where willing volunteers go and they are randomly assigned conservative/libertarian blogs – maybe by picking names out of a hat – to disrupt and distort comment threads? Seems like a boring job to me, but then I have a life.

Muirgeo is confounded with a left/liberal/progressive/Marxian set of premises.

There's not much to be done about it.

You can show him two dimensions in the political spectrum and he persists in seeing only one dimension.

MethinksFebruary 19, 2009 at 7:44 pm

The something big occurred when Glass-Steagall was over turned and the something big occurred when Bear-Stearnes closed its doors.

As usual, you are wrong. That something big happened when America became such a prosperous country that it was no longer impossible for the useless morons that are your ancestors to live long enough to reproduce. Since they were too stupid to do anything other than engage in reproductive activity, the country became overpopulated by single digit IQ idiots like you. That's when this sled picked up speed as it skidded toward the cliff.

MethinksFebruary 19, 2009 at 7:47 pm

Nothing discussed here is that simple. Help me. Is there a sort of Troll Central where willing volunteers go and they are randomly assigned conservative/libertarian blogs – maybe by picking names out of a hat – to disrupt and distort comment threads

If you live in the country, you probably know that the unfortunate reality is that keeping rodents out of your house is difficult. Once they're in, they're very hard to get rid of.

Marty SFebruary 19, 2009 at 8:03 pm

borqueronman,

Nice comment. I have been watching muir on this blog for a while. Muir is a totally dishonest commenter. I could care less if one has a certain political opinion, but this muir dude is an outright liar. I don't bother to heckle anyone else on this blog, but muir needs to be exposed for who he really is: a lying crook.

RickCFebruary 19, 2009 at 8:47 pm

Here's a link outlining the massive growth of regulatory spending under Bush.

I guess, everything from the passage of the minimum wage hike and the resultant increase in teen unemployment to the warming trend on Mars – is the fault of the GOP. I really don't find it helpful because it doesn't come from a…
Posted by: boqueronman

Let me guess you voted Republican these last several years and you're having a heck of a time reckoning the disaster that is our country and you're own actions and beliefs and responsibility. I've been down that road and there ARE no easy answers. But the best you can do is always question yourself.

I challenge any of you to throw yourself into a left leaning blog and put your ideas to the test. Try Economists View, Moneyed Politicians, Think Progress or some other such blog.

If like me you are more interested in having your own positions tested you will do so. If you're an ideologue who's beliefs constantly need affirmation and constant propping against the back ground onslaught of real life facts and events then you will like a pussy stay amongst True Believers like yourself and receive daily bread and preaching from the choir.

MethinksFebruary 19, 2009 at 10:52 pm

I challenge any of you to throw yourself into a left leaning blog and put your ideas to the test.

Idiot, I grew up in university towns with crunchy granolas because my parents were academics. If I want to discuss ideas, I'll do it with people who are much smarter than you. First of all, your idols like DeLong make a habit of deleting comments that don't adhere to his strict leftist beliefs because the fat hypocrite is only interested in his inane ramblings. At least the professors here have not kicked your annoying ass off this blog despite the fact that you not only can't cobble together a coherent sentence (let alone argument), but they both consider you a complete moron. Second, your problem isn't what passes for your "arguments". The problem is that you're a barely literate idiot who doesn't understand his own arguments. You're incapable of logic. You're just that dumb. You're not interested in having your ideas tested because a.) you have no ideas and b.) you're too stupid to know what a test of an idea is. Your real reason for coming here is that you are too dumb to figure out how to do anything else.

Since I know the professors aren't keen on us laying out the truth for you repeatedly on every thread, this is all I will say about it. For now.

Marty SFebruary 19, 2009 at 11:04 pm

Muir,

You lying imbecile. I have personally tried to post comments @ delong's and krugman's blogs. I know others who have done the same. These dishonest crooks are so insecure that they either delete the comments immediately or do not approve the comments. You myopic twit, you do nothing but to puke the official dogma of the marxism repeatedly on this blog.

I can do your patients a favor by collecting all the inanities you post here and sending it to your hospital.

Dumbass. If you had any honor, you will be apologizing to the whole world for your lies.

muirgeoFebruary 20, 2009 at 2:25 am

Marty S

You're funny. You make me laugh. Have you been forgetting your medicine lately? It's ok if you have I mean I like you the way you are… just sayin.

And methicks good job with the 5th grade commentary as always. No one in the school yard wants to mess with you!

MethinksFebruary 20, 2009 at 9:05 am

Moron, don't lie. You have no idea what a fifth grade is. You never made it to fifth grade. Now, run along to and quit polluting a perfectly good blog.

MethinksFebruary 20, 2009 at 9:09 am

Oh, and thanks for destroying the comment section for the Rick Santelli thread, half-wit. Since you never closed the tag in your idiotic drivel, nobody else can post.

Moron.

Marty SFebruary 20, 2009 at 10:36 am

Muir,
You sick joker. It would be funny, only if I was joking. You psychotic twit, are you even half a human being?

muirgeoFebruary 20, 2009 at 11:39 am

Oh, and thanks for destroying the comment section for the Rick Santelli thread, half-wit. Since you never closed the tag in your idiotic drivel, nobody else can post.

Moron.

Posted by: Methinks

Yeah but it's actually pretty cool because anywhere you click it goes to Rick Santilla telling us how half of his traders were all for their own bailout of $800,000,000,000…. you know the same jerks asking for a revolution because of another bailout of 1/10th as much when it was going to main-street Americans.

I mean those two videos is ALL one needs to understand the mentality of these guys who think they are doing something of worth on their trading floor when in fact they are simply leeching off the true productive economy.

That may have been the meanest thing you've ever said about Methinks! While she was using intellectual words like "moron", and "village idiot" (which was actually my inspiration for V.I. Mierduck) I don't think Mierduck had any clue that he was being insulted. The time she called him a "dumb-ass" may have been when it dawned on him that Methinks was insulting him.

After all, if Beavis and Butthead understand that "dumb-ass" is an insult, Mierduck might understand it, too. I might be giving him too much credit by assuming he's as intelligent as those two.